Revenue Management

#BlogOctober High Drama at Carnegie Hall

The New Yorker has an article on Ronald Perelman's sudden resignation from Carnegie Hall's board, a few months after becoming its chair, following a conflict with Carnegie's long-time executive and artistic director Clive Gillinson, "citing a frustration in attempting to obtain from Gillinson “a full picture of Carnegie Hall’s financial operations, especially as it related to profits and losses involving performances.”", to use the wording in the New Yorker

The issue, according to a New York Times article, extended in fact beyond “profits and losses involving performances”, although that seems to have been of particular importance to Perelman. And why not? I am not sure if the information would have been useful, but isn't it valuable knowledge to have in order to gain a clear picture of the institution's financial health?  

We also learn that: "Noting that the Warner Music Group is owned by a company founded by Len Blavatnik, who sits on Carnegie’s board, Mr. Perelman began raising questions about whether the arrangement had been properly vetted for potential conflicts of interest, since it was effectively promoting the name of a business controlled by a board member."

Although the New Yorker article appears geared toward primarily insulting and/or antagonizing Perelman behind vague generalizations about donors, I find it deeply insulting to today's major donors. The paragraph is worth stating in full (emphasis is mine): "That Weill and Perelman come from the world of high finance is a crucial element in the problems at Carnegie and elsewhere. Thirty years ago, arts boards were dominated by figures from the corporate world—people who were principally engaged in building things, and who had deep knowledge about, and concern for, the maintenance of large institutions. Many of them also had an abiding love of classical music. But in the ensuing decades, leadership has passed to a class of wealthy persons whose love of the art is less profound and whose background in speculation and finance leads them to expect a return, sometimes an immediate return, on their investment—a mindset that often leads such people to remake or destroy companies and institutions, not cherish them."

Someone please explain to me - dumb little me with my PhD in Electrical Engineering and Computer Science from MIT - about how asking about profits and losses at the institution you have a legal obligation to oversee with care (as board chair) amounts to "expect a return, sometimes an immediate return, on their investment." I read the line about such people not cherishing arts institutions as: shut up and give money, you 1% people who don't really understand classical music. It seems to me that the New Yorker article suggests that, if as a major donor you want to make sure your money is used in the best possible way and offer (forceful) suggestions, that means you are a traitor who does not Cherish the Great Cause. 

This completely misreads the atmosphere of the time, where major donors are reluctant to be the only ones paying to realize the grand vision of executive and artistic directors. This translates into the current trend of setting up most gifts as challenge gifts/grants (recommended by Michael Kaiser formerly of Kennedy Center in his many books), where donors match donations on a pre-specified ratio. Major donors don't want to blissfully sign the checks that other people will spend without checks and balances anymore. It is so easy for arts institutions to dream that wealthy people should blindly support their case. But they earned their money and they have a right to check that it is well spent. 

Apparently people teetered on the brink of heart attacks when Perelman suggested to bring more pop acts to Carnegie. Now, I'm not sure it's a good idea, and Perelman is described as too forceful and authoritarian a decision-maker to be effective in a performing arts context, but Perelman later backtracked. Either board members are expected to make suggestions and the executive artistic director decides whether to implement them, or they are expected to rubber-stamp whatever the artistic director comes up with, but I'm not sure there is a middle ground on that one. If the institution ever hits difficult times, the rubber-stamping will be Exhibit A of the board's incompetence. The media will have a field day claiming that board members were "asleep at the wheel" or too busy enjoying the social side of board membership to pay attention to the numbers they were presented with. Perelman tried to do the right thing, albeit in a very misguided way. Maybe a more balanced article would not have been too much to ask from a publication such as The New Yorker.

The problem for me was more that Perelman suspended Gillinson without asking for the input of the rest of the board. We live in a time where the authoritarian mode of leadership has fallen out of fashion. When an accomplished leader forgets to build support for his ideas, he is quickly pushed out. This is what we observed here. 

The other problem is that performing arts organizations today want a lot of money to do what they want to do, and there aren't too many people with the sort of money they want. But to have that sort of money today, you are probably a very successful entrepreneur rather than someone who inherited a fortune from daddy. People who have made enormous fortunes as entrepreneurs can be forgiven for thinking they know a thing or two of how to run a successful business. They lose track of the differences between their business, especially if finance-related, and the performing arts organization they donate to, but maybe the performing arts organizations could better educate them in order to benefit from their fresh ideas and insights.

Some performing arts organizations today seem to want the money without the strings attached, and plop major donors into a seat at the board as "brownie point" for donating without really wanting them there. But the thing is, these people worked for the money they have. We may find their compensation unjustifiably large, but they worked for it. And hoping to get their money without giving them anything in return except a social club, aka board meetings, for them to be entertained not only is singularly short-sighted but overlooks the fundamental differences between donors today and thirty years ago, whom the New Yorker author apparently so misses.  

Now, what could be done about "profits and losses" at Carnegie Hall? I'm not sure Perelman could have used that information. Major pianists or orchestras, for instance, do U.S. tours every year or every other year. What is Carnegie Hall going to say if they're too expensive - sorry, go elsewhere? They would, and it would affect the brand of Carnegie Hall as the premier classical music venue in New York City. Performing arts organizations use their money-makers to fund their losses. The goal isn't to have every performance a money-maker.

More interestingly would be to discuss how to price tickets to recoup the performer's fees and meet the institution's mission, such as introducing a wide range of patrons to classical music. Which tickets are sold first? Which performances are sold out, and how quickly do they sell out? Which price categories could support a price increase while supporting the mission of making music available to all? Which price categories might be further decreased? Are seats correctly assigned to the right category? Should more categories be created? Should time-varying pricing be implemented and reflect the increased knowledge on seat availability as the time of the performance grows near? If certain performances, or certain categories of seats at those performances, sold out months in advance (I'm thinking of Sir Simon Brattle with the Berliner Philharmoniker, for instance), I'd like to argue that at least some of the tickets could have supported a price increase and thus further contributed to the funding of Carnegie Hall's operations. 

In other words, finance in performing arts extends far beyond profits and losses, but asking to see the P&L statement was taking a step in the right direction. Board of trustees members shouldn't view the executive or artistic directors as their puppets - they are not becoming decision makers simply because they provide money. On the other hand, if some performing arts organizations expect major donors to keep funding their projects without being allowed to know where their money goes, I think they are fundamentally misreading their donors base. But it also means an opportunity for performing arts organizations transparent enough to provide that information: they could soon attract a lot of money.

Pricing at @NewYorker

NewYorker_Prices(This is a repost of a piece I wrote for my Engineered blog. Enjoy!) It occurred to me the other day that the New Yorker has increased its retail price by over 28% in a year, in two increases of $1 each, so that the price is now $8.99. (See picture.) The Economist, being smarter about those things, doesn't print its retail price on the copies it sends subscribers, but I saw at the bookstore that its retail price is $7.99. I found The New Yorker's price increases interesting for multiple reasons. I'll try to list them below while giving my thoughts some semblance of order.

First of all, I'm sorry to disappoint all The New Yorker fans who read my blog, but I don't think it is worth more than The Economist. Actually, to formulate this in a stronger way, when you use as a basis of judgement whether a publication is important to understand the world we live in today and as a quantitative metric of its importance the retail price it charges its customers, I think The New Yorker is worth less than or perhaps just as much as The Economist, but definitely not more. A lot of articles in The New Yorker are hit-or-miss: some articles are stunningly good (especially those by Alex Ross, Joan Acocella or Peter Schjeldahl) and certain in-depth investigations or profiles fill an important need in today's media landscape (anything by Jane Mayer or Dexter Filkins), and then there are entire issues of The New Yorker that I put straight into the trash bin right after receiving them because there's nothing in the table of contents that makes me want to read. Please spare me the song of "The New Yorker is so great it should charge even more" or variations thereof such as "The New Yorker deserves to be more expensive than a cup of coffee at Starbucks". I don't know what you buy when you go to Starbucks but the cups of black coffee at Starbucks are massively cheaper than $8.99. (They're of the order of $2 and change at Port Authority Bus Terminal. Really.) Heck, I don't even think the venti Frappucino with an extra shot is $8.99. So it's a bit easy to give The New Yorker a free pass on its price just because it's The New Yorker. (I have included a list of recent articles I've enjoyed at the bottom of this post. I swear, there have been plenty.)

My first reaction when I noticed the price increase was: uh-oh, The New Yorker either has money problems or is under pressure by its owners to make more of a profit. (The magazine is published by Conde Nast, in case you're wondering. You'd think, though, that with The New Yorker festival and ancillary merchandise such as books, desk diaries and more, that they'd be among the best positioned magazines to be financially healthy.) But I'm also reading Subscribe Now! Building Arts Audiences Through Dynamic Subscription Promotion by Danny Newman, and if you're ever tempted to buy this book I'll save you the price of the paperback and summarize the book for you in one sentence: subscribers are the solution to all (performing arts organizations') problems.

The long version of the book summary is: subscribers are the solution to all (performing arts organizations') problems and don't believe anyone who says that their performing arts organization can behave differently because every single time the author has been involved in a subscription drive he's been able to help sell many more than expected, put more people in the theater than expected and find more subscribers than anyone thought possible. You've got to admire someone who was able to write an entire book short on specifics around one sentence, but he did, and clearly the man has a very strong track record in sales, both of subscriptions and of his book (which is now a bit dated anyway).

Having the book in the back of my mind, it then occurred to me that perhaps, just perhaps, the increase of The New Yorker's retail price could reflect not any financial trouble or pressure by owners but a desire to push more occasional buyers of The New Yorker toward subscriptions, which provide more financial stability for the magazine and allows for the funding of the in-depth features that have less commercial appeal by the success of those that do. Introductory subscription offers are $12 for 12 weeks (it is interesting that the introductory subscription webpage states that subscriptions will be automatically renewed after the 12-week introductory rate but doesn't state at which rate). Gift all-access (print + digital with archives access) subscriptions are $70 (rather, $69.99) while renewals of all-access subscriptions are $100 per year ($99.99 to be precise), or $2.13 per print issue. So now, even if you only read one New Yorker issue out of four, you are better off renewing your subscription rather than canceling and buying it in the newsstands once in a while. (You can't be too precise with those calculations, though, because the subscription price might increase and you also have to factor in the value of the convenience to get the magazine in your mailbox rather than remembering to trek to the newsstand to buy one and the value of having access to the online archives.)  

It is worth pointing out that the New Yorker operates under an automatic auto-renewal model when you renew online: your credit card gets automatically charged at auto-renewal time. Other magazines offer auto-renewal as an option but let renewing subscribers renew their subscription without auto-renewal. Of course the magazine will refund you if you cancel your subscription later, but it does increase the hurdle for a subscriber to drop out. Which, from a revenue management perspective, is a very good thing. From a customer care perspective, it is maybe not quite as good. If there is also an increase in subscription price, then two things may happen: (1) you may not notice it because they don't tell you in advance and then your credit card is charged and it's done, (2) you may actually begin to think that perhaps since you don't have time to read much of The New Yorker anyway, you could spend the money on something else. On the other hand, for people who do subscriber to The New Yorker, the subscription can be an "identity symbol": they're the sort of people who care about the topics The New Yorker writes about, and will renew no matter what (unless the price really becomes exorbitant), in which case it might be just as well to make auto-renewal automatic because subscribers would then be very price-insensitive.

So what is the summary of this long post?

(1) Revenue management and pricing are topics that fascinate me. Unsurprisingly, I do research in them.

(2) The New Yorker should take a page from The Economist's playbook and not print the retail price on the issues it sends to subscribers, because people like me notice the tiniest things. And then they write 1,200-word blog posts about it and feel very happy about their posts. (Go to point (1) for a refresher.)

(3) The New Yorker is very good at ramping up prices to move people toward a subscription model and keep them subscribed.

(4) Even if you only read one issue of The New Yorker out of four, you're better off staying subscribed.

Finally, as a random idea, The New Yorker should consider having prizes for the best in-depth feature published in its pages in a given year, the way Harvard Business Review does. It could also involve subscribers by running contests where readers would pick the best articles from the online archives over a certain period. It seems to me that the online archives are a bit underused, and their format is not easy to read online, unless perhaps on a tablet. While The New Yorker has published some collections of its articles over the years, there is the potential to do a lot more. Perhaps it could involve subscribers in picking the articles that would be included in some of the anthologies. Another worthwhile question would be how to create more of a community among New Yorker readers and subscribers beyond the New Yorker festival, perhaps through a network of book clubs where people meet and discuss certain articles. Of course it all depends on the objectives The New Yorker has for its readership and how its readers fit into its big-picture strategy. If the goal is for the articles to have maximum impact (either for their intrinsic worth or to keep advertisers happy or both), then strategies to make current occasional readers and subscribers read more articles or read articles in depth might be worth investigating.

Some recent New Yorker articles I think highly of: